FOREX: Confidence in US Dollar Assets Holds Up After Rating Cut

The US Dollar and Treasury bonds show no signs of a crisis in confidence after Standard and Poor's cut the credit rating of the world's largest economy last week.

Talking Points

• US Treasuries Rise After S&P Downgrade, 2-Yr Yield Hits Recode Low
• European Central Bank Vows to “Actively” Implement Bond Purchases
• G7 Pledges to Cooperate to Quell Unrest in “Disorderly” FX Markets

With little of note on the economic calendar, the markets are left to digest the impact of Friday's Standard and Poor's downgrade of the US sovereign credit rating. Traders appear to be interpreting the news in terms of its implications for already crumbling global economic growth expectations, with higher US borrowing costs as a result of the rating cut seen as yet another headwind facing the post-Great Recession recovery. Stocks tumbled in Asia, dragging the sentiment-sensitive Australian and New Zealand Dollars along for the ride. The Swiss Franc and Japanese Yen outperformed. S&P 500 stock index futures are pointing aggressively lower late into the overnight session, signaling more of the same ahead.

Perhaps most interestingly, the market is clearly signaling that the downgrade has not changed the role of US Treasuries as the go-to safe haven asset, with bonds across the spectrum of benchmark maturities trading higher and the corresponding yields on the decline. In fact, the yield on the 2-year note hit a record low at 0.252 percent. Meanwhile, the US Dollar gapped down at the open against most of its counterparts but has since strengthened, hardly giving any indication of a confidence crisis in assets benchmarked against the currency.

Looking forward, speculation about what may emerge from Tuesday's Federal Reserve policy meeting may produce a bit of a bounce in risky assets as markets correct from oversold conditions. The news flow over the past several weeks has been undeniably disappointing, and interest rate futures positioning suggests traders are holding out hope for another stimulus effort (or at least a hint thereof). The first round of Italian and Spanish bonds purchases by the European Central Bank ought to reinforce this dynamic, narrowing periphery bond spreads and reducing perceived default risk in the near term, after the bank pledged to implement the program “actively” overnight. A G7 pledge to act on concert to stabilize “disorderly” currency markets is likely to help as well, at least in the near term.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:01	GBP	Lloyds Employment Confidence (JUL)	-53	-	-50
23:50	JPY	Bank Lending Banks ex-Trust (JUL)	-0.6%	-	-0.6%
23:50	JPY	Bank Lending incl Trusts (YoY) (JUL)	-0.5%	-	-0.6%
23:50	JPY	Current Account Balance (YoY%) (JUN)	-50.2%	-40.1%	-51.7%
23:50	JPY	Current Account Total (JPY) (JUN)	527.B	652.8B	590.7B
23:50	JPY	Adjusted Current Account Total (JPY) (JUN)	922.8B	961.1B	391.0B
23:50	JPY	Trade Balance - BOP Basis (JPY) (JUN)	131.5B	113.1B	-772.7B
0:00	NZD	QV House Prices (YoY) (JUL)	-0.4%	-	-0.9%
1:30	AUD	ANZ Job Advertisements (MoM) (JUL)	-0.7%	-	3.8% (R+)
4:30	JPY	Bankruptcies (YoY) (JUL)	1.4%	-	1.5%
5:00	JPY	Eco Watchers Survey: Current (JUL)	52.6	50.0	49.6
5:00	JPY	Eco Watchers Survey: Outlook (JUL)	48.5	-	49.0
5:00	JPY	Bank of Japan Monthly Economic Report	-	-	-

Euro Session: What to Expect

GMT	CCY		EXP	PREV	IMPACT
5:45	CHF	Unemployment Rate (JUL)	2.8%	2.8%	Medium
5:45	CHF	Unemployment Rate s.a. (JUL)	3.0%	3.0%	Medium
6:30	AUD	Foreign Reserves (AUD) (JUL)	-	41.1B	Low
6:30	EUR	Bank of France Business Sentiment (JUL)	-	99	Low
8:30	EUR	Euro-Zone Sentix Investor Confidence (AUG)	3.4	5.3	Low

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4125	1.4455
GBPUSD	1.6281	1.6507

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